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Is the Welfare State Relevant for Economic Growth? Evidence for Portugal

Abstract

In this paper, we describe the evolution of welfare state spending in Portugal in the period 1980–2018 and consider its implications for economic growth. Overall, welfare spending in Portugal increased over this period as a percentage of GDP, but stagnated or even declined in recent years. Our empirical analysis attempts to quantify the contribution of welfare spending to economic growth in that period. We provide a comprehensive robustness check by means of specification-curve analysis. We conclude that the sign of the effect varies with the specification choices, but neither positive nor negative estimates are robust.

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Notes

  1. 1.

    Voyvoda and Yeldan (2005) use an overlapping-generations model to analyse an earlier IMF-led intervention of a similar nature in Turkey. They argue that this intervention distorted welfare policies with harmful consequences for human capital accumulation.

  2. 2.

    Nevertheless, note that Caminada et al. (2019) argue that, in the period after the Great Recession, fiscal policies associated with welfare provision were still effective in reducing income inequality, namely through pensions. For a more general view of inequality and financial globalization, see Furceri et al. (2020).

  3. 3.

    To choose the number of lags in the VAR model, the researcher could use information criteria such as the Akaike information criterion, Schwarz’s Bayesian information criterion, or the Hannan–Quinn information criterion. The approach used in this paper, which included the Granger causality tests (very popular in applied econometrics), led to specifications where the number of lags is always one. Therefore, we feel that for our present purposes it is unnecessary to use information criteria, which would introduce another choice (the choice of the information criterion to use) and increase the number of specifications under analysis. In addition, in a short sample such as ours, using information criteria of an asymptotic nature may not be desirable.

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Acknowledgements

The authors are very grateful for the comments received from two anonymous referees and to the Editor of the Special Issue, Andreea Stoian.

Funding

Funding was provided by COMPETE 2020, Portugal 2020 and the European Union through FEDER; and national funds were provided by Fundação para a Ciência e a Tecnologia I.P./MCTES (Grant No. POCI-01-0145-FEDER-029365; PTDC/EGE-ECO/29365/2017).

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Bação, P., Simões, M. Is the Welfare State Relevant for Economic Growth? Evidence for Portugal. Comp Econ Stud 62, 494–520 (2020). https://doi.org/10.1057/s41294-020-00126-z

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Keywords

  • Welfare state
  • Social spending
  • Economic growth
  • Portugal
  • VAR model
  • Specification-curve analysis

JEL Classiication

  • C22
  • I38
  • O11
  • O52